Best Efforts

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DEFINITION

An agreement in which an underwriter promises to make a full-fledged attempt to sell as much of an initial public offering as possible to the public. Best effort agreements are used mainly for securities with higher risk, such as unseasoned offerings, or in less-than-ideal market conditions.

INVESTOPEDIA EXPLAINS

Best efforts relieve underwriters from responsibility for any unsold inventory in the event that they are unable to sell all the securities. The underwriter does not guarantee that it will sell the entire IPO issue in a best efforts agreement. Such an agreement limits the underwriter's risk, but also limits the underwriter's upside because it receives a flat fee for its services.


Underwriters and issuers can handle IPOs in different ways. In contrast to a best-efforts agreement, a bought deal requires the underwriter to purchase the entire IPO issue and the underwriter's profit is based on how many shares it sells, and the spread between the discounted purchase price and the sale price of the shares to the public.






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